Euro deal a lift after bearish year

A midnight deal to stave off the collapse of the euro zone pushed up the Australian market by 1.2 per cent on Friday but with shares still down 11.1 per cent this financial year, bearish sentiment is likely to persist.

Euro-zone leaders in Brussels agreed on measures to help Italy and Spain cut the rising cost of servicing their government debt, raising hopes that a sharp recession could be avoided.

But the damage has already been done in Australia. In the past year, the S&P/ASX 200 Index fell at almost twice the rate of the MSCI Global stock index, measured in local currency terms.

It was the first financial year of negative returns since the depths of the global financial crisis, dealing another blow to already weak returns on superannuation. The bear stockmarket has now lasted almost five years – shares are still 36 per cent below the peak in early 2008. Investors have responded by turning from equities to bank deposits. Data this past week shows 26 per cent of Australians’ financial wealth is now in cash and bank deposits, well above the long-term average.

The poor returns here contrast with the Dow Jones Industrial average, which in local currency rose 1.5 per cent this year and is now just 10 per cent below its peak.

Yet the US economy is struggling with unemployment at 8.2 per cent and growth of 1.9 per cent while Australia’s economy expanded 4.3 per cent over the year to March and the jobless rate is just 5.1 per cent.

Economists say the S&P ASX 200’s poor performance relative to the economy reflects the fact it is dominated by a few sectors of the economy, namely resources, banks and retailers, which combined account for 54 per cent of the market capitalisation.

Stephen Walters, chief economist for JPMorgan, said resources stocks and banks had both suffered from the negative news coming from Europe and China.

While Asian markets had been driven down because of the risk that China’s economy would have a hard landing after its stimulus, and European stocks had tumbled because of the debt crisis, Australia’s banks had been hit by both. Our large banking sector depends on offshore funding, and our resources are sold to China.

“We are getting hit by these global risks with both barrels,” Mr Walters said.

He said service industries such as health and education, and some areas of household consumption, were fairly strong in Australia but there were no listed companies that allowed investors to cash in.

He said the weakness of the Australian stockmarket contrasted with the strong demand from foreign investors for Australian government bonds. Foreign investors now hold about 80 per cent of Australian government bonds.

Shane Oliver, chief economist for AMP Capital, said Australian companies had announced among the worst profit downgrades in the Western world, with only Spain – the epicentre of the European debt crisis – in worse shape.

He said mining companies were investing heavily in new capacity, which was boosting the economy, but the falls in commodity prices in the past year had cut mining profits.

The ASX 300 Resources Index fell 31 per cent. “The resources part of the sharemarket is not performing in line with the mining sector in the real economy,” Mr Oliver said.

He said the high Australian dollar and caution among consumers had depressed some sections of the stockmarket such as retailing, which accounts for about 8 per cent of stockmarket capitalisation.